Global Economics

Inside the Collapse of GM's Opel Deal

From meddling politicians to a skeptical U.S. board to tough tactics in Brussels, GM's sale of the German Opel unit fell apart when its weak logic unraveled

Many refer to the man in charge at the corporate headquarters of General Motors (GM), housed in the five glass towers of the Renaissance Center in downtown Detroit, as "Fix-it Fritz."

Frederick A. Henderson, 50, the chairman and CEO of GM, has always been called Fritz, even as a child. He is a polite man who, in his 25-year career at GM, has acquired the reputation of being a levelheaded numbers and cleanup man, a problem-solver—hence the nickname.

Last Tuesday, the German chancellor made the unpleasant discovery that Henderson lives up to his moniker. In the space of 20 lines on a piece of paper, Henderson destroyed Angela Merkel's dream of being celebrated as the intrepid savior of German automaker Opel.

In the short letter to Merkel's newly appointed economics minister, Rainer Brüderle, Henderson announced that the board of directors planned to "retain Opel Europe as part of the new GM." In explaining the decision, he cited the parent company's "improved financial position" and its newfound confidence in the "sustainable profitability" of the subsidiary. At the end of the letter, Henderson also expressed his appreciation for the "involvement and support of the German government and other European governments."

A German chancellor has rarely been given such short shrift by the chief executive of an industrial corporation. Merkel and half the German cabinet had spent more than a year in negotiations with the US company so that GM's German subsidiary, Opel, could be sold to a consortium of investors headed by the Canadian-Austrian automotive supplier Magna (MGA) and the Russian Sberbank (SBER.RTS). The matter seemed to have been settled—but then GM management performed an about-face last Tuesday. In doing so, it inflicted serious damage on the chancellor, who met with US President Barack Obama and gave a noteworthy speech to the US Congress on the same day.

The surprise coup from Detroit triggered an unprecedented wave of outrage in Germany. Tens of thousands of Opel employees staged protests outside plants in the cities of Rüsselsheim, Bochum and Eisenach, shouting "GM, get lost!" Politicians at the federal and state levels outdid each other with tirades against what Social Democratic Party opposition leader Frank-Walter Steinmeier dubbed the American "impertinence" and North Rhine-Westphalia Governor Jürgen Rüttgers, a member of Merkel's conservative Christian Democratic Union (CDU), described as the "ugly face of turbo-capitalism."

Even the pro-business Free Democratic Party (FDP), the junior partner in Merkel's new coalition government, which just a few weeks ago had been sharply critical of the former administration's rescue plans for Opel, joined in the cross-party diatribes. Economics Minister Rainer Brüderle, who belongs to the FDP, said the GM decision was "completely unacceptable."

Political Humiliation

The real motive behind all this indignation was to cover up a political humiliation of the first degree. Rarely has an administration lost its bearings as much as the Merkel-led "grand coalition" of the Christian Democrats and Social Democrats did in its attempt to forge a new European auto company under the name "New Opel."

German auto executives were not the only ones who felt that the chancellor's plan to mold a Canadian-Austrian automotive supplier, Russia's leading savings bank, the European GM subsidiaries and billions in taxpayer money into a competitive, global company was a ludicrous idea. The plan was also widely criticized abroad. The United States feared that Western know-how would be lost to Moscow, while many in Europe were convinced that Germany was trying to unilaterally protect jobs in its domestic industries. Ironically, Germany—which usually likes to see itself as a strong advocate of fair competition—was blatantly promoting its national industrial interests. "This deal stinks," the British newsmagazine The Economist wrote in a recent editorial.

Detroit's rebuff not only affects the chancellor, but also the state governors involved, who had hastily joined the ranks of those in favor of rescuing Opel. Hesse Governor Roland Koch (CDU), who was considered an expert on economic issues and the United States, was forced to admit: "We fell flat on our faces."

In the end, the Opel sale failed because of the same dilettantism that had characterized the government's initial approach to the sale almost exactly 12 months earlier. A controversial letter from then-Economics Minister Karl Theodor zu Guttenberg, where he wrote that Germany was prepared to support the investor chosen by General Motors "irrespective of the investor's identity," provided GM executives with the excuse they needed to allow the deal to fall through at the last minute. Officials at the European Commission had expressly warned Germany against sending the missive. "That letter was critical to the way the vote turned out," says a management consultant familiar with the negotiations.

Ongoing Plight

At stake are more than 25,000 GM jobs in Germany—and the future of the country's most important industrial sector. The failure of the German plans for Opel shows that the government lacks a strategy for addressing the ongoing plight of the auto industry.

Between January and February of this year alone, more than 58,000 jobs were lost at German carmakers and their suppliers. Daimler (DAI) and BMW (BMWG.DE) are wrestling with the massive costs of developing the electric cars of the future, while at the same time being faced with dramatic declines in sales.

Securing the future of Germany's most important industrial sector in a global battle for market share ought to be a top priority for the country's federal and state governments. But German politicians prefer to behave like teachers who, wanting to make sure their slowest students get enough attention, suspend the lesson for the rest of the class. Last week, officials at the relevant ministries went back to the drawing board to form, yet again, new teams to continue negotiating with GM over possible government bailout funds for Opel.

Propping Up a Poorly Managed Company

The fixation of German economic policy on the Rüsselsheim-based GM subsidiary has become a source of resentment in the boardrooms of German corporations. When the heads of VW (VOWG.DE), BMW and Daimler came together last Wednesday during a meeting of the German Association of the Automotive Industry (VDA), they were unanimous in their belief that rescuing Opel simply means propping up a poorly managed company to the detriment of competitors that are not receiving government bailout funds.

At the same time, it is more uncertain than ever whether the four German Opel plants can even be saved. GM plans to cut about 10,000 jobs in Europe.

There are growing fears among employees that things will be far worse in the end, fears that are being voiced at employee gatherings, such as a protest last Thursday in the western city of Bochum.

Eerily Silent

It isn't loud in Hall 4 of the local Opel plant in Bochum. In fact, it is eerily silent for an event involving more than 2,000 workers with strike experience under their belts.

Things were different in the past, says an older former Opel employee who is watching the event from the other side of the factory fence. "In those days, there would have been a crowd all the way back to the fence." And if someone like North Rhine-Westphalia Governor Jürgen Rüttgers had turned up, "everyone would have yelled things at him."

An assortment of government subsidies was used to lure General Motors to Bochum in 1963. The Opel Kadett was built there, followed by the Astra and the Zafira. At its high point, the plant was producing up to 250,000 cars a year. Long a bottleneck of sorts for the company, the plant is now a symbol of its decline.

Nowadays the roofs leak; buckets have been placed in a workshop near the paint shop to catch the water when it rains. Workers have been let go and bonuses have been slashed. The plant suffered hardships, but it survived. Less than two years ago, when things seemed to be turning around, GM showed up with a contract and a plan intended to rejuvenate the plant and guarantee its survival until 2016.

Executives at Opel now want to hold the parent company to that plan, but it seems that GM is suddenly suffering from a lapse of memory.

Officially, the Bochum plant is still accountable for about 20,000 jobs, even though less than 5,000 people actually work there today.

In front of Gate 4 at the plant, a sympathizer from the far-left Left Party is blowing his whistle for the cameras. Inside, on the enormous factory grounds, Rüttgers is talking about solidarity. The state governor, who is running for re-election next spring, ends his speech with the words: "You are not alone. The fight goes on. Good luck!"

Setting the Right Tone

The Rüttgers speech mirrored much of what these Opel employees have been hearing in recent months. Whenever a federal or state politician came to speak to them, it was never about costs, balance sheets or sales figures. The speakers, regardless of their politician persuasion, had a different agenda: They wanted to set the right tone in the election campaign. That meant not allowing their political rivals to claim the role of Opel's savior.

Under these circumstances, it was almost a foregone conclusion that politicians would soon warm to the Magna consortium's restructuring bid. And although the plan would mean some lost jobs, it would not lead to the loss of entire plants, at least not in Germany.

This was something the governors and the chancellor could easily live with, which explains the unanimity with which almost the entire German political establishment decided to support Magna's bid to become the new owner of Opel, no matter how attractive competing offers, like that of financial investor RHIJ, were.

It was this politically motivated preference for Magna that hurt the project from the start. In the end, it would also seal its failure.

Ticking Time Bomb

As recently as Oct. 15, everything seemed to be clear. General Motors had decided in favor of a partial sale to the Canadian-Russian consortium. In a letter to "Dear Minister zu Guttenberg," GM chief negotiator John Smith wrote that an agreement over the government's financial support was about to be reached. "GM continues to support the selection of Magna and Sberbank as the best investment partners for Opel."

At this time, however, a time bomb was already ticking in Brussels. Neelie Kroes, the EU's competition commissioner, had asked the German government and GM to provide assurances that the financial assistance would be granted irrespective of where plants were to be closed and that the choice of Magna as the principal investor was not the result of political pressure.

EU Commissioner for Enterprise and Industry Günter Verheugen, who is German, cautioned the government in Berlin not to write the letter Kroes was demanding, because it would enable the Americans to reopen a case that had long since been decided. Petra Erler, the head of Verheugen's team, warned senior officials at the German Economics Ministry and Chancellery against "playing with fire" and suggested that it would be sufficient for Berlin to state publicly that the government bailout funds for Opel had been provided independently of the carmaker's commitments to individual plants.

Opening the Door

But Guttenberg disagreed. After consulting with the chancellor and the German states where Opel plants are located, he wrote a letter to which observers ascribe a key role in the story of the Opel bailout. In the letter, dated Oct. 17, Guttenberg asked GM CEO Fritz Henderson to provide the statement requested by Brussels. The letter also included a key sentence: Germany, Guttenberg wrote, was prepared to support the investor chosen by General Motors "irrespective of the investor's identity."

GM executives interpreted the letter to mean that the door was open again and that perhaps they could hold onto their European subsidiary after all. If Germany was promising financial assistance to other investors, they reasoned, GM could also qualify.

The letter was received with great interest in Detroit, arriving at a time when General Motors was already feeling stronger. For a long time, the company was so cash-strapped that it saw no alternative to abandoning its European operations. In the meantime, however, the US and Canadian governments had provided the carmaker with a total of $58.5 billion (€38.9 billion) in fresh capital, receiving more than 70 percent of shares in the company in return.

President Obama saw to it that the board of directors of the new, virtually state-owned GM was almost completely replaced. Edward Whitacre, known as "Big Ed," became the new chairman of the board, which would also decide on the future of Opel. Whitacre, a former CEO of AT&T (T), is a man who stops at nothing. When he sees a rattlesnake on his ranch in Texas, he spears it with a stick and kills it. "It's not a big deal," he says.

'The Best Solution for Our Brand'

Whitacre was opposed to the Opel sale from the beginning. At this point, GM's position had improved considerably, partly as a result of the company's having filed for bankruptcy. In addition, business had improved somewhat, thanks to the government's "Cash for Clunkers" program and the numbers at Opel were not as bad as expected, either.

The mood within the GM board began to shift, prompted by those who had been skeptical about the Opel deal from the start and by irritation over the German government's maneuvering. After initially pressuring GM to sell Opel to Magna, it was now claiming that all investors would be equally welcome.

Only one senior GM executive, CEO Fritz Henderson, had apparently failed to recognize that the winds had changed before the critical meeting. Just four days earlier, he had insisted that the Magna deal was going to happen.

Then the board decided that GM was not going to sell Opel, after all. Henderson was quick to explain why this was the best of all solutions and, in doing so, demonstrated that he has the basic quality for a career at GM: flexibility.

At 10 p.m., Central European Time, Henderson made a conference call to the European top managers to inform them of the board's decision. It had been "an excellent selling process" and everyone had pitched in, he said, and now the board had opted for a solution that was "the best solution for our brand."

The executives in Detroit were apparently indifferent to the fact that the GM board had publicly embarrassed the German chancellor with its decision and had even done so on the day of her speech to the US Congress. The board meeting happens to fall on the first Tuesday of each month, and it was all nothing but an unfortunate coincidence, say members of the GM board of directors.

A Change of Mood

But those involved in the negotiations in Germany admit that several things went wrong with the deal. The government "chose Magna too quickly," says a senior official from one of the states where Opel has a plant. This, in turn, led to friction between the government and the EU. Besides, says the official, the German negotiators should have made allowances for the change of mood in the GM board earlier, particularly as it was already clear in August that the majority backing for the Magna deal was faltering.

The Opel drama has also been the source of considerable irritation among senior management at Daimler, BMW and VW. It deflects attention away from a much bigger problem: The future of the entire German automobile industry, not just Opel, is in jeopardy. Even BMW and Daimler, two eminent symbols of the success of Germany as the world's former top exporter, are now worried about their future. Erich Klemm, the chairman of the Daimler works council, says: "Our very existence is at stake."

The auto industry is embroiled in a battle for survival. About 56 million vehicles will have been sold worldwide this year, compared with the roughly 90 million cars produced in existing plants (see graphic). Everyone knows that not only will plants have to be closed, but that not all manufacturers will survive the inevitable weeding-out process.

Many countries have supported their auto industry in the dog-eat-dog battle for survival. The United States nationalized General Motors, while France is spending billions on propping up Renault and the PSA Group, the parent company of carmakers Peugeot and Citroën.

One in seven jobs in Germany are dependent on the industry and Berlin has so far launched two initiatives to help it survive the crisis. The first initiative was directed at Opel, and the second one, Germany's "cash for clunkers" scrapping premium, was intended to help all carmakers.

Both approaches were relatively ineffective. They were, however, tremendously risky and had significant knock-on effects.

In the Opel bailout, a company that had entered a crisis as a result of mismanagement was being rewarded. Saving Opel plants with government funds will not reduce excess capacity in the industry. In fact, it only threatens jobs at other manufacturers, such as Fiat (FIA.MI) and Renault (RENA.PA), and perhaps even Volkswagen in Germany.

Misguided Policies

VW CEO Martin Winterkorn has calculated that his company could sell 300,000 more cars if Opel and its British sister company, Vauxhall, disappeared from the market. For VW, the production of 300,000 additional vehicles would mean that a plant like the one it operates in the northwestern German city of Emden would be operating at full capacity.

The heads of VW, BMW and Daimler would consider it completely misguided for Opel to receive loan guarantees if the brand remained part of GM. This is a policy that might be used to help an individual plant survive for a few years, but it cannot guarantee t